OBJECTIVES OF TOPIC 4 PUBLIC GOODS

1. OBJECTIVES OF TOPIC 4 PUBLIC GOODS

2. OBJECTIVES After completing this topic, the student should be able to: • discuss the properties of public goods • Understand the concept of a pure public good ; contrasted with the concept of a pure private good. • Make distinction between the demand curves for pure public goods and pure private goods. • Realise market provision of pure public goods is unlikely to be an efficient alternative. • Differentiate congestible public goods and price-excludable public goods – to realise that it is difficult to generalize about actual arrangements used to provide public goods.

3. OBJECTIVES cont.. • An important goal of this chapter is • to derive the efficiency conditions for a pure public good. In doing so - we emphasize the external benefit associated with the provision of pure public goods. • see that consumption of a unit of a pure public good by any one person results in external benefits to all others. • Understand that a pure public good, therefore, requires the annual output up to the point at which the sum of the MB of all consumers equals the MC of making the good available. The sum of the individual MB is the MSB of each unit of the pure public good.

4. OBJECTIVES cont.. • numerical example dealing with the provision of security protection in a small community : • is used to derive the efficiency conditions and to illustrate a Lindahl equilibrium. • The model of cooperative supply for a pure public good shows how the efficient output of a pure public good could be provided in a small community without government. • The above sets the stage for analysis of the free-rider problem and provides a basis for understanding why government supply with compulsory taxation emerges in large groups.

5. CHAPTER OUTLINE • The Characteristics of Public Goods • Pure Public Goods and Pure Private Goods • An Example: Bread versus Heat • Provision of Private Goods and Public Goods: Markets and Government • Congestible Public Goods and Private Goods with Externalities • Education as a Public Good • The Demand for a Pure Public Good • Efficient Output of a Pure Public Good • A Numerical Example

6. CHAPTER OUTLINE cont.. • Public Policy Perspective: National Defense and Homeland Security • A Cooperative Method of Efficiently Supplying Pure Public Goods: Voluntary Contributions and Cost Sharing • The Lindahl Equilibrium • Generalizing the Results • The Free-Rider Problem • Compulsory Finance

7. Major Points on Topic 4 • distinctions between pure public goods and pure private goods: example- • Television programming example of a good that is nonrival in consumption. • An improvement in environmental quality through a reduction in air pollution provides a good example of a good whose benefits are nonexclusive. • the transactions costs of excluding consumers depends on current technology. • Improvements in technology can reduce the transactions costs of pricing goods and thereby subject them to exclusion. • A pure public good is both nonrival and nonpriceable.

8. Major Points on Topic 4 • the theory of public goods is related to the theory of externalities- it helps understand why pure public goods are unlikely to be efficiently supplied through markets. • A pure public good is one whose market exchange would result in positive externalities to all citizens of a nation. • take note thatthe nonrival characteristic of a pure public good implies that the MC of accommodating an additional consumer is zero for a given quantity of the good. • Figure 4.1 make the distinction between the MC of producing another unit of the good and the MC of allowing another consumer to enjoy a given quantity of the good.

9. Major Points on Topic 4 • bread versus heat example: • To make the point more strongly,- by adjusting the thermostat level in the classroom , there is no way we can change the temperature for oneself without changing it for everyone else in the room. • difference between demand curves for pure public and pure private goods: • for private goods consumers have freedom to move along the quantity axis, given price. • For the pure public good, consumers must move along the quantity axis together. • Cooperative supply of pure public goods requires a means of allowing consumers to express their valuation of additional units of pure public goods: • The MSB of any given quantity of a pure public good is the sum of the individual MB of all consumers. • To achieve efficiency, this must equal the MSC of the good.

10. Major Points on Topic 4 • The security guard example : • point out that a person’s tax is stated as a certain amount per unit of the pure public good. • The total tax bill in equilibrium for each member of the community is their tax per unit multiplied by the number of units supplied. • NOTICE that the Lindahl equilibrium is efficient. • The Lindahl prices are tax shares per unit of the public good equal to each person’s MB at the output for which MSB = MSC.

11. Major Points on Topic 4 • The free-rider problem - the best example : provision of public television and radio programming. • many beneficiaries of these services choose not to contribute to financing the programming. Nonetheless, many viewers and listeners do contribute. • According to the analysis – • free-rider problem can be overcome. • free-rider problem becomes more acute in large groups because each participant realizes that withholding his contribution is unlikely to have a significant effect on total output. • the probability of no voluntary contributions becomes greater.

12. Major Points on Topic 4 • Discussion of the free-rider problem sets the stage for the analysis of compulsory taxation and the role of government in supplying pure public goods. • in the real world actual provision of goods by alternative means must be evaluated on an ad hoc basis. • the characteristics of congestible and price-excludable public goods have implications for efficiency